Texas Two-Step

The Texas Two-Step is a bankruptcy strategy in which a solvent company uses a Texas "divisive merger" law to split itself in two, placing its asbestos or talc liabilities in a new company with limited assets, which then files for Chapter 11 bankruptcy. The rest of the business continues outside bankruptcy.

Origin

Texas law allows a company to divide into two or more companies and allocate its assets and liabilities among them. Beginning in 2017, several companies facing asbestos claims used it: Georgia-Pacific (Bestwall), CertainTeed (DBMP) and Trane Technologies (Aldrich Pump and Murray Boiler). Johnson & Johnson used it in 2021 for talc claims through LTL Management; the Third Circuit dismissed that bankruptcy in 2023 because the company was not in financial distress.

Significance in Asbestos Context

A two-step bankruptcy halts all lawsuits against the new company and, usually through court orders, against the parent as well, sometimes for years, while claimants wait. Supporters say it resolves mass claims efficiently; critics say it lets healthy companies use bankruptcy to cap what they pay injured people. For a claimant, the practical effect is that suits against the company are frozen and any recovery depends on the plan and trust that eventually come out of the case.

Example Sentence

Her lawsuit against the drywall maker stopped when its new subsidiary filed for bankruptcy after a Texas Two-Step.

Related Terms

Chapter 11, 524(g) Trust, Channeling Injunction, Successor Liability, Asbestos Trust, Mass Tort

Notes

• If a defendant in your case goes through a two-step, ask your lawyer which claims are stayed and whether others can proceed.
• Claims against other companies and existing trusts usually continue.